Global Economics

Miners Furious over Australian Tax Plan

The mining industry reacted with outrage to a proposed 40% "super-tax" on profits in Australia, but they'll likely cope with the surcharge—if it's ever enacted

Some of the giants of the mining industry, and their backers in the City of London, have reacted with a mixture of anger and surprise to plans by the Australian government to impose a new resources tax. Shares in London-listed companies fell by as much as 7 per cent in trading yesterday, which was the stock market's first opportunity to react to the Canberra administration's plans to introduce a so-called "resources super-profits tax" from July 2012. The 40 per cent charge has already become known as the Henry tax, after Australia's Treasury minister, Ken Henry.

There is strong public support in Australia for higher levies on mining groups. Commodities such as iron ore and coal form a large part of Australian exports, and as prices have recovered from savage drops last year there have been calls for the profitable sector to contribute more to the economic recovery.

"The Australian people deserve a fair return on the resources which they themselves own," said the Prime Minister, Kevin Rudd. Arguing that the some of the biggest miners were largely foreign-owned and had made $80bn (£53bn) over the past 10 years, Mr Rudd added: "At the same time governments, on behalf of the Australian people, have received only an additional $9bn over that period. That means these massively increased profits, built on Australian resources, are mostly, in fact, going overseas."

The tax will be levied on profits from Australian onshore mining operations. Companies would get a refund of state royalties, but combined with company taxes and after allowing for extraction costs and recouping capital investment, the miners will pay a statutory rate of about 58 per cent, according to Treasury estimates.

Some companies have responded by threatening to withdraw investment from Australia. The US coal miner Peabody (BTU) said on Monday it would "factor in" the potential effects of the tax on its bid for its Australian rival Macarthur Coal (MACDF), while the iron ore exploration group Cape Lambert (CFE:AU) said it had scrapped plans for a A$400m (£242m) iron ore project in Western Australia's Pilbara region.

However, Mr Rudd is gambling on the mining groups largely swallowing the proposals. BHP Billiton (BHP)and Rio Tinto (RTP), two of the biggest operators in the country, condemned the Henry tax yesterday, but rejected speculation that it could scupper their huge $116bn joint venture in Pilbara. Both have said they could save $100m in synergies from the project. Rio and BHP are listed in both London and Sydney.

Nonetheless, both offered thinly veiled threats that they could withdraw investment from other projects. David Peever, Rio Tinto's managing director in Australia, rejected Mr Rudd's suggestion that the taxpayer was not seeing an adequate return from the mining sector.

"All Australians benefit from a strong mining sector. In the same way all Australians are affected by measures that hurt the mining sector," he said. "Australia was saved from the worst of the [global financial crisis] by the strength of the resources sector, but the same industry is now being portrayed by the government as not paying its way."

Marius Kloppers, the chief executive of BHP, said: "The stability and competitiveness of the tax system have been central to the investment in resources in Australia."

Mick Davis, the chief executive of Xstrata (XSRAY), which has coal, copper and nickel assets in Australia, described the tax as "highly regrettable." Anglo American (AAUKY), which made about 10 per cent of its operating profit from Australia last year, declined to comment.

Rio and BHP could be hit particularly hard. Some analysts predict that Rio Tinto could see its Australian earnings fall by as much as 30 per cent, while BHP could see an extra 19 per cent of its earnings going to the Australian taxpayer.

The mining groups know that if Canberra is determined to push through the proposals there is little likelihood of them significantly paring back investments. Australia's mineral-rich territory is key to their operations, meaning that any critical statements are likely to sound rather hollow in the longer term. In what could be a fillip for the sector, analysts pointed out that commodity prices could actually increase as a result of any tax increase, because funds are withdrawn from less profitable assets and supply is cut.

There is also significant doubt about whether the proposals will ever be enacted. Mr Rudd's minority Labour government has failed to get several bills on to the statute book in recent months, and faces a general election by next April at the latest. There will be many on the right of the political system who will oppose the Henry tax, which would make Australia one of the most expensive markets for the mining industry.

The effective rate in Australia would rise from 43 per cent to 58 per cent, compared to 40 per cent in the US and 38 per cent in Brazil, which is run by its socialist President, Luiz Inacio Lula da Silva.

Analysts also doubted that the effect of the tax would be as bad as the market initially feared. Michael Rawlinson, of Liberum Capital, said that the plans still have a number of hurdles to overcome before becoming law: "We think the proposal is unlikely to be successful in its current form. The mining sector is already a key tax generator and employer for Australia, therefore we do not consider it likely that government will impose onerous legislation that would inhibit Australia's status as a mining-friendly jurisdiction."

The real danger for the miners is if the Henry tax leads to demands for higher levies elsewhere. As Christian Georges, of Olivetree Securities, said yesterday, the move could lead to other administrations casting an envious eye over mining sector profits.

"Governments in southern Africa and South America in particular will see the move by Australia and think that higher taxes on the mining industry are distinctly attractive. Not only do many have big deficits, but levies like the Henry tax also play very well with electorates," he said.